The cloud and communications stocks to own in 2024, according to Oppenheimer

Heading into 2024, Oppenheimer favors AI infrastructure arms suppliers in 2024, as AI should drive major productivity improvements for the economy and its Cloud and Communications sector. The firm’s top picks are Microsoft (MSFT), Cloudflare (NET), DigitalOcean (DOCN), and Cogent Communications (CCOI).

2024 OUTLOOK: Oppenheimer believes monetization of GAI and 5G will be the overriding theme for 2024, while Cloud and Communications development will remain organic and volatile. The firm sees CAPX spending on AI GPUs doubling in two years to about $100B, driving a 2-times multiplier in cloud/SaaS revenues with a lag.

TOP PICKS: Oppenheimer favors AI infrastructure arms suppliers in 2024, as AI should drive major productivity improvements for the economy and our Cloud and Communications sector. Its top picks are Microsoft, Cloudflare, DigitalOcean, and Cogent Communications. Further, the firm sees cloud supply/demand driving pricing power, signaled by channel checks and Azure prioritizing external customers over internalizing LinkedIn workloads.  Data collection and model training remain the focus, but it expects more AI application revenue in the second half of 2024. This should benefit C3.ai (AI), Amdocs (DOX), CSG Systems (CSGS), Nice (NICE), and Verint Systems (VRNT).

Oppenheimer also thinks Equinix (EQIX) is well positioned on scarce datacenter supply, but the Street is looking for more evidence of AI monetization — same for Akamai (AKAM) and Fastly (FSLY). The firm’s channel checks suggest most C-suites are pushing to embed AI in every product to drive productivity and innovation with competitive risks demanding it. The biggest risk to Oppenheimer’s thesis is generative AI not enabling successful revenue up-sell or credit markets shutting back down. Overall, its top four picks – Microsoft, Cloudflare, DigitalOcean and Cogent — are leveraged to this and could exit 2024 with revenue growth 100-300 bps higher than expected, Oppenheimer adds.

On the communications side, the firm notes T-Mobile (TMUS) and Comcast (CMCSA) are its top picks as it continues to favor wireless in the communications space and Comcast over Charter (CHTR). The communications industry is seeing better pricing power and lower subsidies, driving strong free cash flow growth, Oppenheimer says. Some of this is driven by lower subscriber growth rates due to declines in legacy TV and saturation in broadband and wireless. The firm also believes the wireless industry is set to see some new revenues from upselling, IoT and enterprise networks following three years of rapid 5G mid-band deployments that now cover 70% of the country.